RANCHO CUCAMONGA, Calif. -
Credit Union Journal: What are credit unions doing to protect themselves and their members from the so-called “subprime mortgage market meltdown”?
Penrod: First and foremost, not getting taken in on exotic loans and predatory lending has kept credit unions at an arms length from the problems facing many lenders. The key is, credit unions focus on member service rather than the quick buck. Not to say credit unions didn’t examine exotic loans, but they determined exotics were not in the best interests of their members, so they didn’t go that route.
CUJ: What can credit unions do to plan and prepare?
Penrod: Because credit unions have been helping those with poor or struggling credit for so long, most of the things they need to do are already in place. If individuals have trouble paying their car loan, the credit union can move a payment or two to the end of the loan term. While many financial institutions are having to react and create programs, credit unions have had these programs in place since the beginning.
CUJ: Should CUs look at the current market as an opportunity? Should they develop “rescue” loans and other mortgage refinancing options?
Penrod: It definitely lends an opportunity for credit unions to show the high level of service they’ve always offered. While the mortgage market is getting a lot of press right now, credit unions have been helping people who are struggling with debt since the beginning. That is the backbone of credit unions–to assist those in need.
It goes beyond just the mortgage. I’ve spoken with credit unions who are doing extensions or modifications to auto loans or credit cards. If an auto loan has four years left and the person is stuggling, the credit union will give the member a loan skip to allow them to get their feet settled but not lose the loan.
A lot of the media are calling this a subprime meltdown, but to me, subprime means nothing more than a lower credit score. Subprime is not bad, and not all subprime lenders got into exotic or predatory loans–such as stated income, low- or no-documentation loans. Many subprime borrowers got into a fixed rate, and they’re not the issue. They’ll be fine. Those who could only afford a $400,000 house but wanted an $800,000 house went with a lender that didn’t require them to prove they made $15,000 per month, or whatever they put on the application. Those are the people having trouble.
CUJ: What are banks or other competitors in the market doing?
Penrod: Capitol One closed its mortgage arm and Countrywide is ramping up its lending requirements to stop offering mortgages to anyone with a FICO score lower than 680–where subprime previously was 620. Credit unions are here to help people, and people still need mortgages and other loans to live. Raising your requirements to that level chokes off a good portion of the population.
Risk-based pricing has always been part of credit unions. The key is being proactive–alert members who have an adjustable-rate loan, let them know the credit union is here for them, talk and work something out.
CUJ: How does the tightening of credit affect credit cards competition?
Penrod: When people get in trouble financially, one of the first things they do is go to their credit cards. So it is likely we will see more and more credit cards used as members struggle to make ends meet.
Again, credit unions should be proactive. If someone is struggling a little, offer an increase in their line, or, if appropriate, offer a decrease in their rate. That way, the member has something to fall back on while their mortgage shakes out.
